Wednesday, March 17, 2010

Money (That's What I Want)

As they say in investment banking circles, Liverpool Football Club is “in play”. This is not an Americanism for what happens on the pitch, but means that the club, or at least part of it, is up for sale. Unpopular owners Tom Hicks and George Gillett must secure £100m investment by July to reduce their outstanding £237m debt to the Royal Bank of Scotland (RBS). The first serious expression of interest emerged over the weekend from the New York-based Rhone Group, a private equity group specialising in “mergers and acquisitions, leveraged buyouts, recapitalization and partnerships with particular focus on European and transatlantic investments”. By all accounts, the mysterious company has offered £110m for a 40% stake, which would substantially dilute the current owners’ holdings to 30% each.

So what are the chances of this deal happening? That’s the 64 million dollar question. Despite their obvious and urgent need for additional funding, ironically the biggest obstacle to any agreement may still be Messrs Hicks and Gillett, who continue to over-value the club. The Rhone Group’s offer implies a total value of £275m, but the owners are understood to want over £300m, while their initial instructions to managing director Christian Purslow was to give up only 25% for £100m, giving a £400m valuation. An unnamed source commented, “it’s highly unlikely that they’d be interested in an offer at that level”, especially as the offer is to pay off debt with no money going directly to Hicks and Gillett. Of course, they may have no choice, but remember that they have already rejected a much higher offer of £500m from Dubai International Capital (albeit in the far headier times of March 2008), while as recently as late 2007 Hicks placed a quite ridiculous £1 bln valuation on the club, when he offered DIC a 15% stake for £150m.

"Probably not reaching for his wallet"

Back in the real world, you have to ask whether the Rhone Group is a credible bidder. Owned by the exotically named and low profile Robert F. Agostinelli and M. Steven Langman, it is not a major player in the private equity industry and has no track record in football. Would an investment company just looking to make a quick buck be willing to put up with all the aggravation associated with putting money into a football club? It is also curious that details of the bid have leaked out, as serious investors tend to conduct their business in the utmost secrecy and the Rhone Group has hardly courted publicity in the past. Even if this is a genuine bid, there is always the risk that the group could walk away after conducting due diligence, which is exactly what happened when private equity group Apax Partners took a closer look at Woolworth’s books (not exactly the wonder of Woolies).

There are also serious doubts that anyone would be happy to invest £100m+ for a minority stake, thereby lacking overall control. As Purslow told fans group Spirit of Shankly, according to their version of the meeting minutes, “Some (investors) don’t just want a percentage, some want 100 per cent. No investor is going to want to invest £100m and have a smaller stake than the present owners”. Indeed. Why on earth would any investor want to fund the current owners’ growth plans and effectively hand the upside to Hicks and Gillett? Most investors would wish to own the club outright or as a minimum hold a majority (controlling) interest. Actually, given the constant infighting between Hicks and Gillett, why would anyone want to work with them at all? Hicks himself dismissed “management by committee” when rejecting DIC’s offer two years ago.

"Brand values"

Like Stevie G arriving in the penalty area, timing is everything, so it is surprising that any investor would show his hand this early in the game. You would expect most to remain on the sidelines, letting the clock tick down ever closer to RBS’ July deadline, which should further reduce the price they would have to pay, especially if the team fail to qualify for next season’s Champions League. This was worth around £20m to Liverpool last year, but improved TV and sponsorship deals signed by UEFA mean that the size of the prize is even higher next season. As Professor Tom Cannon of Liverpool University said, “qualification for the Champions League remains the crucial factor in enabling the club to maintain income at current levels. Given the current distribution in English football, the £30m, £40m, £50m you get from the Champions League is the key differentiator”. Purslow agreed that this is vitally important, “the loss of Champions League football next season would impact upon income and this has a relevance to investors”.

As well as the monetary cost, non-qualification would further damage what the marketing bods call “the brand”. The failure to reach the Champions League knockout phase and the early exit in the FA Cup at the hands of Championship strugglers Reading have already hurt the club’s reputation at the worst possible time for the owners, i.e. when they are frantically searching for new investment. Tom Cannon again, “It’s the effect on the image. It’s much easier to raise money for a club that is at the top or seems to be going to the top than a club that seems to be going in the other direction”.

"Show me the money"

Any investors would also be acutely aware that they would require very deep pockets. As well as sorting out the debt, they would need to provide sufficient working capital to cover costs and potentially absorb losses. They would also need to find enough money to rebuild an under-performing squad. Star striker Fernando Torres has ratcheted up the pressure by declaring in the Spanish media that Liverpool are “four of five class players” short of a successful side. The veiled threat is that without this investment the best players (Torres, Gerrard, Mascherano, Reina) will be looking for the way out of Anfield. On top of that, they would need at least £400m to build the new stadium, which is the great white hope of the moneymen.

On the other hand, there are some good reasons to invest in Liverpool. The Rhone Group clearly smell a moneymaking opportunity, as their whole raison d’être is to profit from under-valued assets. In a way, this transparent greed is preferable to the false bonhomie exhibited by Hicks and Gillett in their first stage-managed appearance, which involved false smiles, scarf waving, constant references to the Kop and manfully avoiding using words like “franchise”. The fact is that Liverpool is famous throughout the world and is still one of the leading global football brands, playing in the richest club competition in terms of broadcasting revenue. Even though their revenue increased from £133.9m to £159.1m in their last accounts, they still have plenty of room for growth. They are the fourth placed English club in Deloittes Football Money League 2010 with revenue of £184.8m, which is significantly lower than the other “Big Four” teams (Manchester United £278.5m, Arsenal £224.0m, Chelsea £206.4m).

"The special relationship"

Most of the turnover growth came from broadcasting revenue, which is now actually the main source of income at the club, as a result of the lucrative deals the Premier League has signed with Sky and (to a lesser extent) the BBC. The money received partly depends on the number of games televised and where the club finishes in the Premiership, but is protected by the recent deal signed by Richard Scudamore with its significant increase in the payment for overseas rights. TV income is also dependent on the Champions League and the last accounts reflected Liverpool reaching the quarter-finals, so there is likely to be a reduction this year after their failure to reach the last 16.

There is also plenty of scope to increase commercial revenue. The prospectus issued to potential investors last year targeted growth from £59m to £111m in the next five years, which seems very ambitious, especially when you realise that Liverpool already make more from this income stream than Arsenal and Chelsea and only a little less than Manchester United. Nevertheless, the commercial team has already signed a new shirt sponsorship deal with Standard Chartered Bank, reputedly worth £20m per season for four years from next season, which is much more than the current sponsor Carlsberg pays. However, “probably the best lager in the world” will continue to be one of the club’s main partners, paying £6m per annum for the privilege. They have also secured other deals with Adidas, 188BET and Bank of America.

"Grounds for optimism"

However, the real key that could unlock Liverpool’s revenue possibilities is a new stadium. Anfield is a wonderfully atmospheric old ground, but its capacity is only 45,000, which is much less than Old Trafford (76,000) and The Emirates (60,000). According to Deloittes, Liverpool’s matchday revenue of £42.5m is less than half of Manchester United (£108.8m) and Arsenal (£100.1m), while even Chelsea, whose Stamford Bridge ground is even smaller (42,000), earn more from this category (£74.5m). The bean counters would also be licking their lips at the potential to increase ticket prices, as Liverpool only earn £30 per seat at each game, compared to around £50 at the other clubs. Indeed, the investment prospectus revealed that Hicks and Gillett were considering raising ticket prices by 8% and/or converting 1,000 seats to more profitable corporate boxes.

But it is the long-awaited new 73,000 capacity stadium at Stanley Park that would really transform matchday income. This project is currently on hold, due to financial constraints, but the hope would be that securing the £100m additional investment would improve the club’s creditworthiness, thus persuading the banks to provide the finance to finally begin work on this dream. Of course, whether the stadium would be filled is then partly down to the performance of the team – attendances have been below capacity at Anfield for most of this season.

"I said, we need new players"

Maybe the most positive aspect of the Rhone Group offer is that it might flush out other potential investors. Only last week, a city source claimed, “Liverpool’s owners are not anywhere close to a deal to sell a major stake in the club. There is some way to go yet”. Last year’s accounts drily noted, “The current economic conditions have had a significant impact upon world credit markets and accordingly raising finance in this environment is challenging”. You can say that again. This has been a frustrating search to date for managing director Christian Purslow and there has been speculation that he deliberately leaked details of the Rhone Group’s offer to encourage other potential investors to break cover. Over the past year the press has mentioned many possible buyers, including Saudi princes, Kuwaiti billionaires, Indian industrialists, anonymous Americans and our old friends DIC, but the club have yet to find a wealthy benefactor: either a reputable businessman or even someone on a big ego trip.

The reason that Purslow has been clocking up so many air miles is in response to the demands from the club’s bankers RBS for a £100m “equity rise” to alleviate the debt situation. Although it had been known for months that the club had been seeking additional investment, it was only relatively recently in his meeting with Spirit of Shankly that Purslow confirmed, “This is a requirement from our bankers”. He is even more explicit in the contested version of the minutes, “The £100m pay down is compulsory. It has to be done”. There is a school of thought that RBS might take pity on Liverpool, especially as they are largely state-owned, but it is not so long ago that Barclays made a stand over Southampton’s overdraft, ultimately pushing them into administration. The consequences of not securing the necessary investment would be frightening for the club, leading to a fire sale similar to the one which West Ham have just endured.

"Smooth Operator"

The debt is hanging over the club’s future like the Sword of Damocles, leading to a reworking of the club’s anthem “You’ll Never Walk Alone” to the cruel “You’ll Never Get A Loan”. Hicks and Gillett paid around £185m for the club in 2007, but took on further borrowing facilities of £113m for in the club, giving total debt of just under £300m. The last published accounts (up to 31 July 2008) of Kop Football Holdings, Liverpool’s parent company, listed debts of £359.7m up £77.5m from the prior year, with the company also being saddled with a new £58.2m debt to its own holding company, Kop Football (Cayman) Limited, which also happens to be owned by Hicks and Gillett. As at 31 January 2009, the total owed to the banks (RBS and Wachovia) was £313m, though Christian Purslow has confirmed that the debt is now down to £237m, largely as the owners had to pay £60m with their own money last July as part of the refinancing.

Before the credit crunch, loans of this magnitude would have been expected to be repaid over three to four years, but this payment was for only a one-year extension to the loan. Dr. Rogan Taylor, director of the Football Industry Group at Liverpool University, was among many critics of this agreement: “It is little more than an expensive fix – just sticking plaster, making things more difficult for the club to progress in the long run. It is still very short term, year to year, if that”. The problem for Liverpool is that their debt comes from bank loans, which have short repayment dates, as opposed to the long-term bonds issued by Arsenal and Manchester United. Arsenal’s debt is locked in at reasonable interest rates for 20 years, which gives them a lot of breathing space. Liverpool’s anxiety before their mid-2009 refinancing was highlighted in the prospectus issued by Rothschild and Merrill Lynch, which included the possibility of raising £50m via the infamous, hugely expensive PIKs (payment-in-kind loans) used by Manchester United, which would have risen to £100m over five years. Talk about a red alert.

"Blow me - you know the rest"

The last accounts laid bare the impact of the debt and fully exposed the madness of the leveraged buyout, as the relatively healthy profits of £10.2m in the football club were more than wiped out by enormous interest payments of £36.5m, leading to a large loss of £42.6m in Kop Football Holdings – even in a bumper revenue year. As a comparison, before Hicks and Gillett piled debt onto the club, the annual interest payments were never higher than £3.0m. I can hear the commentary now, “And it’s Liverpool playing in the red”. As a further sign of financial incompetence, £18.7m was spent in the period on work (architects’ fees) relating to the proposed new stadium in Stanley Park. This is on top of the £10.3m written-off the year before, which means that nearly £30m has been wasted on a stadium “that is as far away as ever from being started, let alone finished”. Liverpool’s auditors KPMG went public with their concern over the level of debt before last July’s refinancing, when they described the issue as “a material uncertainty which may cast significant doubt on the group’s and parent company’s ability to continue as a going concern”, though the club described this as a fairly standard comment while debt negotiations are underway.

In response, RBS took the unprecedented step of writing to fans to stress that the club is “financially healthy and able to service comfortably its debt obligations from cash flow generated by its playing and commercial activities”. They also took great pains to distinguish between the obligations of the club and the parent company (i.e. owners). This is in line with a firm commitment made by Hicks and Gillett when they bought the club, “The payment of interest on, repayment of or security for any liability due under the (borrowing) facilities will not depend to any significant extent on the business of Liverpool”, but this is patently not the case. In fact, in early 2008, Tom Hicks admitted that the football club was responsible for the interest payments in the parent corporation via a statement from his PR company, Financial Dynamics, “The holding company debt is supported by the assets it acquired and should there ever be any shortfall in cash flow at the club or anywhere else in Kop in any given year, Kop’s ownership, under the terms of the financing package, is prepared to fund whatever is required”. All together now, “Working for the Yankee Dollar”.

"Statler and Waldorf"

The financial conditions have obviously impacted the team. Last December, manager Rafael Benitez admitted that Liverpool’s title prospects were undermined this summer, “One of the priorities this year was to reduce the debt”. He admitted that the club was burdened with unrealistic expectations, given that his transfer budget is unlikely to improve without further investment. His ability to spend has been limited to what he raises through player sales. Although Christian Purslow has stated that there was a net spend of £20m last summer, he failed to mention that this figure included new long-term contracts awarded to the most valued players, and Benitez confirmed that his net spend was, in fact, zero. The investment prospectus actually suggests that net transfer spending per annum, including improving player contracts, will be locked at £20m until 2014. By all accounts the reason that Benitez lost out on Gareth Barry was because Manchester City could pay the £12m transfer fee upfront, while Liverpool were only prepared to pay in installments.

So it’s fair to say that Hicks and Gillett are not exactly flavour of the month with Liverpool fans, which is hardly surprising given the string of broken promises. They said that they were different from Manchester United’s hated owners and they would not “do a Glazer” by burdening the club with a mountain of debt, but that is exactly what they have done. They promised to invest in the team and to build a grand new stadium, which was the main reason why former chairman David Moores and chief executive Rick Parry decided to sell. Back in 2007, George Gillett famously said, “the shovel needs to be in the ground in the next 60 days or so”, but when work on the stadium was put on hold due to unfavourable market conditions, he vehemently denied this, “Bullshit, that was not me”, causing concern about his memory – or concept of honesty.

"How To Get Ahead In Advertising"

It is clear that Hicks and Gillett have suffered in the financial downturn. Although still very wealthy, Tom Hicks has lost his billionaire status according to Forbes magazine’s latest rich list and last year suffered the indignity of defaulting on the $525m debt in his Hicks Sports Group holding company, leading to the sale of the Texas Rangers baseball team. George Gillett’s portfolio has also been hit and he has sold his stake in the Montreal Canadiens ice hockey club and scaled back his NASCAR activities. From Dollar signs to danger signs.

Hicks and Gillett have constantly treated the fans with contempt with the accounts revealing that they charged the club nearly £900k to cover “travel, legal, personnel and other expenses” and £1m for “transaction-related expenses”, in other words their costs in buying the club. Proving that the apple doesn’t fall far from the tree, Tom Hicks Jnr. was forced to resign from the board after sending an abusive email to a Liverpool fan. This has resulted in some very public displays of anger from the fans with Spirit of Shankly starting a billboard campaign, “Tom and George. Debt, Lies, Cowboys. Not welcome here”, while there is a coordinated movement to email RBS, warning of a product boycott if the bank provides Hicks and Gillett with an extension to their loans.

"They'll have the shirt off your back"

This is why so many people are hoping that managing director Christian Purslow succeeds in his search for new investors. Fans say that he has not put a foot wrong so far, but short of mooning the Kop, it’s hard to see exactly how he could blot his copybook compared to the club’s owners. One of his qualities is his relentless optimism, but that can also have its drawbacks, such as the missed deadlines he announced for new money (February has been and gone). Even the much praised £20m Standard Chartered sponsorship deal is dependent on the team achieving a number of targets, “a significant element of the deal is performance-related with bonuses to be paid out should they win the Premier League or Champions League”. Getting the ball out, he parroted Rafa Benitez when boasting, “We will be in the Champions League, for sure”. I hope that the fans’ faith is justified, but let’s not forget that his background is the banking industry, which has been exposed as being full of fools and charlatans. Indeed, those with a long memory will recall Purslow’s role in the utterly shambolic and ultimately unsuccessful attempt to float Formula One when he worked for Salomon Smith Barney.

Let’s hope that Purslow can indeed deliver, as Liverpool are one of football’s great institutions. Investment might yet come from the Rhone Group, though some fans might be wary of another American investor. Once bitten, twice shy. What is abundantly clear is that the club needs new money (and a lot of it), otherwise who knows what the consequences might be. They might even have to consider the unthinkable and plan a ground share with local rivals Everton. As Macca might have said, “Yesterday, all my troubles seemed so far away”.

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